There are financial mistakes that can lead to financial difficulties. Even if you are already facing challenges, avoiding these common mistakes can help you stay afloat during difficult times. The first step is understanding them.
Paying Your Debt with Savings
You might think if your debt has a higher interest rate than your savings, it makes sense to use the savings to pay for your debt. However, it is not as simple as it might seem, as you would lose money on compound interest. You might get hit by fees if you take funds out of your retirement accounts. If you do pay off your savings with debt, you should live as if you still have a debt to repay, which is the amount you took out of your savings. A better option might be to look into refinancing for debt like student loans. It can give you a better interest rate or more time to pay it back. You can refinance student loan amounts of nearly any balance, and it’s usually a better option than borrowing from your savings.
Purchasing a Brand-New Car
While many new cars are sold every year, few can actually afford to pay for them. Simple money management tips will tell you if you can’t pay for it with cash, you can’t afford the car. Borrowing funds to pay for the vehicle means you will be paying interest on it, even as it loses value. If you like to trade in your vehicle every few years, you can lose money. If you need to get a vehicle, shop around for a gently used vehicle. You can also look for an efficient one so you won’t be buying as much gas. These also tend to cost less to maintain and insure. Even though vehicles are expensive, you can mitigate the costs by not buying more car than you need. While a family might need a large SUV, a couple without children may be able to purchase a smaller sedan. The brand matters too, as some tend to have expensive repairs after a few years, and others last for many years.
Always Relying on the Next Paycheck
Few households would have enough money to live on if they were to lose their next paycheck, and this can result in them going into debt if an unexpected expense were to come up. Overspending can put you in a precarious spot, where missing a paycheck could result in disaster. If a recession hits, you won’t want to be in this spot, as you will be left with few options. It’s a good idea to create an emergency fund and have at least three to six months’ worth of living expenses in your accounts. While it should be separate from your main checking account, it should still be easily accessible. If you lose your job or the economy changes quickly, your savings could be drained, and you could end up in debt, so having this three-to-six-month buffer can keep you from losing your car or home.
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